Anthony Casa's List: Fortune Articles

• • Why
• Therefore the economy will not stabilize until mortgages are adjusted down to the value of homes, with affordable payment schedules, and until new mortgages become available across the home-price spectrum
• If President Obama promptly and decisively resolves these problems, whether or not he adopts my recommendations, and restores public confidence, he can end the recession by early 2010. If not, the economy will languish for a long time. Given the economic uncertainty, investors who are too worried to buy equities might consider tax-exempt bonds with yields around 6%, equivalent to almost 10% before federal, state, and local taxes. Investors who want to hedge the risk that federal deficits might lead to longer-term inflation and drive up interest rates, causing these bonds to decline, might buy some TIPS, or Treasury inflation-protected securities, as well. TIPS are U.S. Treasury bonds whose principal amount varies with consumer price indexes to provide holders with a rate of return in constant dollars. TIPS prices currently imply near-term deflation, and that means that they would appreciate in value if inflation comes back.

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• Yes, there's been a tremendous amount of capital thrown into the system, but my concern is that it's just going to plug the holes. It's not going to create new liquidity, which is what the system so desperately needs.
  
• What happens in 2009? Frankly, it's hard for me to predict what's going to happen next week, never mind next year. What I will say is that I expect all these banks to be back in the market looking for more capital. We'll also have a wholesale restructuring of our banking system, probably toward the end of 2009. There will be banks getting smaller, banks going away, and banks consolidating. At the same time, though, I think you'll see more new banks created. We've already seen more applications. And it's a great idea: You start with a clean balance sheet and make loans today with today's information. Plus, right now you've got a yield curve that's good for lending.
• I think the overall economy will be worse than people expect. The biggest issue will be consumer spending. If 2008 was characterized by the market impacting the economy, then 2009 will be about the economy impacting the market. It's already started.
  

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• One approach I am comfortable with is owning shares in wonderful businesses that do well in all circumstances - Johnson & Johnson and the like. They rarely fly out of the park, but provide long, steady gains that will get you where you want to go. They often have huge cash hoards, e.g., Cisco, Apple, Microsoft, and Berkshire Hathaway, whose war chests exceed $20 billion. Or Hewlett-Packard, Google, Intel, or IBM, all in the $10 billion league. Such companies can take advantage of a weak market just as private investors would, with the difference that they know very well how much to pay for what fits their product line
• In the present environment I favor companies that can prosper in the lean years ahead. So, not Saks, but Wal-Mart; not Neiman Marcus, but Dollar General. Or specialists, such as Fastenal, Monsanto, or Schlumberger.
  
  And when should you buy? In or near what I call the Time of Deepest Gloom, if you can spot it.
  

• Historically, the way you make money in times like these is that you find things where the fundamentals are unimpaired. The fundamentals of GM are impaired. The fundamentals of Citigroup are impaired.
• In my view, U.S. stocks are still not attractive. Historically, you buy stocks when they're yielding 6% and selling at eight times earnings. You sell them when they're at 22 times earnings and yielding 2%. Right now U.S. stocks are down a lot, but they're still very expensive by that historical valuation method. The U.S. market is yielding 3% today. For stocks to go to a 6% yield without big dividend increases, the Dow will need to go below 4000. I'm not saying it will fall that far, but it could very well happen. And if it gets that low and I'm still solvent, I hope I'm smart enough to buy a lot.
• The key in times like these is to stay solvent so you can load up when opportunity comes.

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• We will dig out of this. And when we do, I hope for a back-to-basics society - where banks and other lending institutions promote real growth and long-term value for the economy, and where American families have rediscovered the peace of mind of financial security achieved through saving and investing wisely. We need to return to the culture of thrift that my mother and her generation learned the hard way through years of hardship and deprivation. Those are lessons learned that the current crisis is teaching us again.
  

• And the list goes on: Our numbers don't go back as far as the Depression, but consumer confidence is plausibly at the lowest level since then. Volatility of the stock market in terms of percentage changes day-to-day is the highest since the Depression. In October 2008 we saw the biggest drop in consumer prices in one month since April 1938. Another thing is that it's a worldwide event, as it was in the Depression.
  
  I'm optimistic that we'll do better this time, but I'm worried that we're vulnerable. One of the lessons from the Depression is that things can smolder for a long time. What I'm worried about right now is that our confidence has been hurt, and that's difficult to restore. No matter what we do, we're trying to deal with a psychological phenomenon. So the Fed can cut interest rates and purchase asset-backed securities, but that only works in really restoring full prosperity if people believe that we're back again. That's a little hard to manage.

• Investors need to recognize these titanic shifts in market and public policies and be content with single-digit returns in future years. Perhaps the most lucrative pockets of value are in high-quality corporate bonds and preferred stocks of banks and financial institutions that have partnered with the government in programs such as the Troubled Assets Relief Program (TARP). While their profitability may be restricted, their ability to pay interest and preferred dividends should be unhampered. Above all, stick to high-quality companies and asset classes. The road to recovery will be treacherous.